Topic: Everything you wanted to know about Grayscale BTC Trust but were afraid to ask! - page 48. (Read 16372 times)
June 26, 2020, 09:40:23 AM
Why is this trust so popular with 50k minimum amount?
June 26, 2020, 09:01:43 AM
Thank you for this interesting post.
Another conclusion that I get is that this is a way for the fund to aquire free BTC just printing paper (shares) with no value other for the buyer than being sold in the secondary market. At the end the fund managers get their 2% fees plus the aquired BTC out of nothing.
Another conclusion that I get is that this is a way for the fund to aquire free BTC just printing paper (shares) with no value other for the buyer than being sold in the secondary market. At the end the fund managers get their 2% fees plus the aquired BTC out of nothing.
June 26, 2020, 07:28:20 AM
Grayscale - major player?
https://cointelegraph.com/news/at-this-rate-grayscale-will-own-34-of-all-bitcoin-by-january
https://cointelegraph.com/news/at-this-rate-grayscale-will-own-34-of-all-bitcoin-by-january
I am really skeptical about this treng going on for so long.
People are buying GrayScale stocks in the primary market because of the 20%, tax free, premium on NAV they can cash-in once they are able to seell on the secondary market.
My guess is that in the long term this premium will have a downward trend, hence reducing the inflow of capital in the primary market.
June 26, 2020, 07:00:05 AM
Grayscale - major player?
https://cointelegraph.com/news/at-this-rate-grayscale-will-own-34-of-all-bitcoin-by-january
https://cointelegraph.com/news/at-this-rate-grayscale-will-own-34-of-all-bitcoin-by-january
June 19, 2020, 11:14:50 AM
<...>
The topic has some images that are displayed not well. Could fillippone spend some minutes to edit image displays, please - with the width option in img blocks).
The topic has some images that are displayed not well. Could fillippone spend some minutes to edit image displays, please - with the width option in img blocks).
Should be fixed now.
It's not the image attribute, it's a well known table formatting bug I forgot to properly fix.
Thank you for pointing out.
June 19, 2020, 09:59:37 AM
It is a due interesting and informative topic. There are so many information that I can not understand but I will try to learn new things. Everyday starts with learning in crypto.
The topic has some images that are displayed not well. Could fillippone spend some minutes to edit image displays, please - with the width option in img blocks).
The topic has some images that are displayed not well. Could fillippone spend some minutes to edit image displays, please - with the width option in img blocks).
June 18, 2020, 02:45:26 PM
Looks like another scam to get hold of peoples money.
June 18, 2020, 01:58:20 PM
Since the publication of PlanB articles, the Bitcoin value proposition has gained a sort of validation based on a solid model, which proved with rigorous maths the rhetoric of “Bitcoin is valuable because it is scarce”.
This made Bitcoin Investment viable for a series of actors, who were ready to embark in a series of legal, regulatory and fiscal hassles to get long exposure to bitcoin. Others will inevitably follow, but those who embarked in this venture earlier gained market shares and profits in a less than competitive market.
One of the most discussed amongst these funds is Grayscale.
The huge amount of bitcoin they bought has drawn attention from the community. Be it because of a signal of institutional adoption or a measure of scarcity of bitcoin when measured against mined bitcoin.
I think many concepts about this fund have been oversimplified, and a few technical details of the inner functioning could better serve a global understanding on how this fund works, how it is used by institutional investors, be it “fiat investors” or whales, and by retail investors.
Given the fact Grayscale was very often commented in the news, some insightful reports, and a very good thread in the Italian board, I decided to go with a thread detailing some of the main aspects, going through some finer details, trying share what I have learned in the process.
During all this article, I will refer to this spreadsheet, where you can see the details of many of the computation. You can open it and play with it.
Thank you to the fellow Italian members who discussed on Grayscale thread by Plutosky on their local board.
Table of Contents
1. Grayscale Company Profile and Faq
On Grayscale Website, we can find a good amount of information about the general company profile and organisation:
Grayscale LLC manages a series of Trusts; they are more or less replicas of each other, with very similar mechanisms.
Those products are privately offered investments, available to investors through private placements.
The objective of each fund is to passively track the performance of the underlying they are tied to. So Grayscale doesn't seek additional yield through active management, investments or other revenue sources. They are totally passive investors.
The Trusts are open-ended, and to this perspective, they are different from the majority of publicly traded futures on any exchange, who are subject to an expiration date, requesting the investor to roll the position over to subsequent contracts (there exist some "Perpetual futures", but their scope is actually limited).
Some of those privately offered investments are also publicly quoted on the public market.
The biggest fund is the Grayscale Bitcoin Trust (BTC), with a little less than 90% of the total AUM of Single assets funds.
GBTC is the only fund that is registered with the SEC, so it is the only one to respect all the required rules by the public agency.
The minimum investment threshold and the management fees represent a piece of notable information.
The minimum threshold at $ 25,000 ($50,000 for GBTC) denotes those products not viable for small retail investors, freeing the Sponsor to a series of disclosure to protect the most inexperienced investors.
The management fee is deducted from the theoretical price on a daily accrual basis to cover annual administration and safekeeping fees.
All these funds have some common regulatory characteristics:
The most notable ones are the Index Provider Tradeblock and Coinbase as custodian.
This means all the computations are executed on the back of Tradeblock price computations (more details on this later) and that the assets are held on a cold wallet at Coinbase.
On a side note, we note that Grayscale is part of a group:
So, CoinDesk is independent from Grayscale, but they are part of the same group.
2. Primary Market
Let's look at the BTC trust fact sheet.
From here it is clear the private trust has the right to issue shares in the primary market following a determined procedure to Accredited Investors (AI), who are the only subject eligible to invest in the Trust.
What are the requisites to be an AI?
Of course, banks, partnerships, corporations, nonprofits and trusts (with funds in excess of $ 5 millions) are considered Accredited Investors.
The procedure to issue new shares is quite simple.
Every day at 4:00 PM the VWAP, a Volume Weighted Averaged Price, of the XBX Index (a volume-weighted average of bitcoin on different exchanges) is computed. This is going to constitute the benchmark index of the fund.
The funding is then divided by this price to determine the equivalent BTC amount. This amount is then divided by the per-Share Digital Asset Holdings to compute the actual number of Shares.
In the attached spreadsheet I provided a live computation:
The Bitcoin per shares amount is a number decreasing each day to reflect the accruing of the yearly 2% fee.
You have an example of computations in the spreadsheet.
This means each share control each day less and less bitcoin, the portion of bitcoins that is not anymore "controlled" by the shares is actually the remuneration for GBTC.
From here you can also compute the NAV.
If you multiply the official Benchmark Price times the Bitcoin per Shares, you get the NAV of each share:
According to Grayscale Website:
So, while each share has a "bitcoin per share" equivalent, the NAV is the US Dollar equivalent of this measure.
As per SEC regulations, The Shares are not freely Transferable. We read on the termsheet, and on the fine print we discover that:
So the subscriber of such shares exposes herself to a 6 month holding window.
At the end of this window, she will be free to sell the shares in the open market. Provided that there is one, as Grayscale is not involved in such.
Also, Grayscale is not accepting those shares back, as buyback agreements are not guaranteed:
So, when you invest in Grayscale shares, you are actually locked into that, and the only way to get rid of those is on the secondary market, after a minimum of six months.
I wrote a post on the thread regarding the restricted shares. Have a look here
3. Secondary Market
As stated on the Grayscale website, eligible shares of Grayscale Bitcoin Trust are quoted on OTCQX® under the symbol: GBTC, making it possible to buy or sell shares continuously through the trading day at prices established by the market.
The market has no relationship with Grayscale, and it is operated independently. There are no market making obligations whatsoever, so price can fluctuate freely according to bid-offer pressures.
This is the graph of the last 12 months, together with volumes.
There is an average of 4.75 millions of shares trading on a daily basis, equivalent to more or less 4,500BTC.
4. Arbitrage
We have seen from previous sections that NAV and Quote prices differ quite a lot.
Buying a quote of GBTC in the secondary market you are actually buying bitcoin at a 20% premium, or you are paying more than 11,350 USD per BTC.
This is not uncommon, being actually a feature of the GBTC.
Buying a quote of GBTC you are actually buying bitcoin at a 20% premium.
Why is that?
Well, the first reason is you probably cannot buy GBTC shares in the primary market.
In the past the issue of shares has been closed from time to time. And it wasn't always possible to buy shares in the primary market, this of course increased demand for quotes in the secondary market pushing the prices and the premium higher.
Secondly many institutional investors cannot trade restricted financial instruments. So they simply cannot buy GBTC shares because they are not freely tradable for the first six months and there is no buying agreement with the issuer.
Lastly there are a lot of investors who would like to buy bitcoins, but simply cannot do that. So they have to buy quotes paying the premium to have an object traded on a regulated exchange, with obvious fiscal, regulatory and legal benefit. Think about a family office who has a mandate to trade only listed products. This would put physical bitcoins out of scope, obliging the money manager to divert to GBTC to get exposure to bitcoins.
These market frictions justify a premium of secondary market quotes versus the NAV of the trust.
This premium has been quite volatile in the past, but contrary to popular belief it hasn't been correlated with "market sentiment" so I guess the driver was outside public information, and has been simply related to offering policies:
This made Bitcoin Investment viable for a series of actors, who were ready to embark in a series of legal, regulatory and fiscal hassles to get long exposure to bitcoin. Others will inevitably follow, but those who embarked in this venture earlier gained market shares and profits in a less than competitive market.
One of the most discussed amongst these funds is Grayscale.
The huge amount of bitcoin they bought has drawn attention from the community. Be it because of a signal of institutional adoption or a measure of scarcity of bitcoin when measured against mined bitcoin.
I think many concepts about this fund have been oversimplified, and a few technical details of the inner functioning could better serve a global understanding on how this fund works, how it is used by institutional investors, be it “fiat investors” or whales, and by retail investors.
Given the fact Grayscale was very often commented in the news, some insightful reports, and a very good thread in the Italian board, I decided to go with a thread detailing some of the main aspects, going through some finer details, trying share what I have learned in the process.
During all this article, I will refer to this spreadsheet, where you can see the details of many of the computation. You can open it and play with it.
Thank you to the fellow Italian members who discussed on Grayscale thread by Plutosky on their local board.
Table of Contents
- Grayscale Company Profile and Faq
- Primary Market
- Secondary Market
- Arbitrage
- In-Kind Buying
- Hedging Strategies
- Conclusions
1. Grayscale Company Profile and Faq
On Grayscale Website, we can find a good amount of information about the general company profile and organisation:
Quote
Grayscale Investments, LLC (“Grayscale”) is the largest digital currency asset manager. With approximately $3.3B AUM,* Grayscale provides opportunities for investors to gain exposure to the digital currency asset class.
Grayscale is the sponsor of Grayscale Bitcoin Trust (BTC), Grayscale Bitcoin Cash Trust (BCH), Grayscale Ethereum Trust (ETH), Grayscale Ethereum Classic Trust (ETC), Grayscale Horizen Trust (ZEN), Grayscale Litecoin Trust (LTC), Grayscale Stellar Lumens Trust (XLM), Grayscale XRP Trust (XRP) and Grayscale Zcash Trust (ZEC), and the manager of Grayscale Digital Large Cap Fund LLC. The trusts and the fund are collectively referred to herein as the “Products”. Any Product currently offering share creations is referred to herein as an “Offered Product”. Grayscale Digital Large Cap Fund is currently not an Offered Product.
Grayscale is the sponsor of Grayscale Bitcoin Trust (BTC), Grayscale Bitcoin Cash Trust (BCH), Grayscale Ethereum Trust (ETH), Grayscale Ethereum Classic Trust (ETC), Grayscale Horizen Trust (ZEN), Grayscale Litecoin Trust (LTC), Grayscale Stellar Lumens Trust (XLM), Grayscale XRP Trust (XRP) and Grayscale Zcash Trust (ZEC), and the manager of Grayscale Digital Large Cap Fund LLC. The trusts and the fund are collectively referred to herein as the “Products”. Any Product currently offering share creations is referred to herein as an “Offered Product”. Grayscale Digital Large Cap Fund is currently not an Offered Product.
Grayscale LLC manages a series of Trusts; they are more or less replicas of each other, with very similar mechanisms.
Quote
The Products are privately offered investment vehicles available to institutional and accredited individual investors through their respective private placements. Grayscale’s single-asset Products provide exposure to Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Ethereum Classic (ETC), Horizen (ZEN), Litecoin (LTC), Stellar Lumens (XLM), XRP, and Zcash (ZEC). Grayscale’s diversified Product, Grayscale Digital Large Cap Fund, provides exposure to the top liquid digital assets by market capitalization and currently holds BTC, ETH, XRP, LTC, and BCH. The Grayscale Digital Large Cap Fund private placement is also offered on a periodic basis to accredited investors* only but is currently closed.
Each Product’s investment objective is for the value of its shares (based on digital assets per share) to reflect the price performance of such Product’s underlying digital asset(s), fewer fees and expenses. Modelled after popular commodity investment products, each Product was created for investors seeking exposure to digital assets through a traditional investment vehicle.
Each Product’s investment objective is for the value of its shares (based on digital assets per share) to reflect the price performance of such Product’s underlying digital asset(s), fewer fees and expenses. Modelled after popular commodity investment products, each Product was created for investors seeking exposure to digital assets through a traditional investment vehicle.
Those products are privately offered investments, available to investors through private placements.
The objective of each fund is to passively track the performance of the underlying they are tied to. So Grayscale doesn't seek additional yield through active management, investments or other revenue sources. They are totally passive investors.
The Trusts are open-ended, and to this perspective, they are different from the majority of publicly traded futures on any exchange, who are subject to an expiration date, requesting the investor to roll the position over to subsequent contracts (there exist some "Perpetual futures", but their scope is actually limited).
Quote
Additionally, Grayscale Bitcoin Trust (OTCQX: GBTC), Grayscale Ethereum Trust, (OTCQX: ETHE), Grayscale Ethereum Classic Trust (OTCQX: ETCG), and Grayscale Digital Large Cap Fund (OTCQX: GDLC) are publicly-quoted on the OTCQX® Best Market, the top tier operated by the OTC Markets Group and available to all individual and institutional investors.
Some of those privately offered investments are also publicly quoted on the public market.
Quote
Except for Grayscale Bitcoin Trust, which became an SEC reporting company on January 21, 2020, the Products are not registered with the U.S. Securities and Exchange Commission (the “SEC”) and are not subject to disclosure and certain other requirements mandated by U.S. securities laws.
The biggest fund is the Grayscale Bitcoin Trust (BTC), with a little less than 90% of the total AUM of Single assets funds.
GBTC is the only fund that is registered with the SEC, so it is the only one to respect all the required rules by the public agency.
The minimum investment threshold and the management fees represent a piece of notable information.
The minimum threshold at $ 25,000 ($50,000 for GBTC) denotes those products not viable for small retail investors, freeing the Sponsor to a series of disclosure to protect the most inexperienced investors.
The management fee is deducted from the theoretical price on a daily accrual basis to cover annual administration and safekeeping fees.
All these funds have some common regulatory characteristics:
The most notable ones are the Index Provider Tradeblock and Coinbase as custodian.
This means all the computations are executed on the back of Tradeblock price computations (more details on this later) and that the assets are held on a cold wallet at Coinbase.
On a side note, we note that Grayscale is part of a group:
Quote
Grayscale is a subsidiary of Digital Currency Group, Inc. (“DCG”). DCG has interests in multiple digital currency ventures in addition to Grayscale. CoinDesk, the leading digital media, events and information services company for the digital asset and blockchain technology community, is also a subsidiary of DCG. CoinDesk is editorially independent from DCG and Grayscale, and any views or opinions expressed by CoinDesk are not the views or opinions of Grayscale.
So, CoinDesk is independent from Grayscale, but they are part of the same group.
2. Primary Market
Let's look at the BTC trust fact sheet.
From here it is clear the private trust has the right to issue shares in the primary market following a determined procedure to Accredited Investors (AI), who are the only subject eligible to invest in the Trust.
What are the requisites to be an AI?
Quote
- Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
- Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000 (excluding the value of the person’s primary residence and certain indebtedness secured by such person’s primary residence).
Of course, banks, partnerships, corporations, nonprofits and trusts (with funds in excess of $ 5 millions) are considered Accredited Investors.
The procedure to issue new shares is quite simple.
Every day at 4:00 PM the VWAP, a Volume Weighted Averaged Price, of the XBX Index (a volume-weighted average of bitcoin on different exchanges) is computed. This is going to constitute the benchmark index of the fund.
Quote
Notably, the official NAV for Bitcoin Investment Trust shares is calculated once daily (on business days at 4pm) by Grayscale, using a weighted average of the XBX Index over the preceding 24-hour period.
The funding is then divided by this price to determine the equivalent BTC amount. This amount is then divided by the per-Share Digital Asset Holdings to compute the actual number of Shares.
In the attached spreadsheet I provided a live computation:
The Bitcoin per shares amount is a number decreasing each day to reflect the accruing of the yearly 2% fee.
You have an example of computations in the spreadsheet.
This means each share control each day less and less bitcoin, the portion of bitcoins that is not anymore "controlled" by the shares is actually the remuneration for GBTC.
From here you can also compute the NAV.
If you multiply the official Benchmark Price times the Bitcoin per Shares, you get the NAV of each share:
According to Grayscale Website:
So, while each share has a "bitcoin per share" equivalent, the NAV is the US Dollar equivalent of this measure.
As per SEC regulations, The Shares are not freely Transferable. We read on the termsheet, and on the fine print we discover that:
Quote
Eligible for resale in accordance with Rule 144 under the Securities Act after a one-year holding period. Pursuant to Rule 144, once the Product has been subject to the reporting requirements of Section 13 under the Exchange Act for a period of 90 days, the minimum holding period will be shortened from one year to six months. We cannot assure you that a secondary market will develop.
So the subscriber of such shares exposes herself to a 6 month holding window.
At the end of this window, she will be free to sell the shares in the open market. Provided that there is one, as Grayscale is not involved in such.
Also, Grayscale is not accepting those shares back, as buyback agreements are not guaranteed:
Quote
Grayscale Bitcoin Trust does not currently operate a redemption program and may halt creations from time to time. There can be no assurance that the value of the shares will approximate the value of the Bitcoin held by the Trust and the shares may trade at a substantial premium over or discount to the value of the Trust's Bitcoin. The Trust may, but will not be required to, seek regulatory approval to operate a redemption program.
So, when you invest in Grayscale shares, you are actually locked into that, and the only way to get rid of those is on the secondary market, after a minimum of six months.
I wrote a post on the thread regarding the restricted shares. Have a look here
3. Secondary Market
As stated on the Grayscale website, eligible shares of Grayscale Bitcoin Trust are quoted on OTCQX® under the symbol: GBTC, making it possible to buy or sell shares continuously through the trading day at prices established by the market.
 | |
| Some information is pretty outdated (market Shares). This image has been taken before the market open, hence the lack of some information (volume, range, etc.). |
The market has no relationship with Grayscale, and it is operated independently. There are no market making obligations whatsoever, so price can fluctuate freely according to bid-offer pressures.
This is the graph of the last 12 months, together with volumes.
There is an average of 4.75 millions of shares trading on a daily basis, equivalent to more or less 4,500BTC.
4. Arbitrage
We have seen from previous sections that NAV and Quote prices differ quite a lot.
Buying a quote of GBTC in the secondary market you are actually buying bitcoin at a 20% premium, or you are paying more than 11,350 USD per BTC.
This is not uncommon, being actually a feature of the GBTC.
 | |
| Premium is now close to historical minimum level, but has been above 100% during certain periods. |
Buying a quote of GBTC you are actually buying bitcoin at a 20% premium.
Why is that?
Well, the first reason is you probably cannot buy GBTC shares in the primary market.
In the past the issue of shares has been closed from time to time. And it wasn't always possible to buy shares in the primary market, this of course increased demand for quotes in the secondary market pushing the prices and the premium higher.
Secondly many institutional investors cannot trade restricted financial instruments. So they simply cannot buy GBTC shares because they are not freely tradable for the first six months and there is no buying agreement with the issuer.
Lastly there are a lot of investors who would like to buy bitcoins, but simply cannot do that. So they have to buy quotes paying the premium to have an object traded on a regulated exchange, with obvious fiscal, regulatory and legal benefit. Think about a family office who has a mandate to trade only listed products. This would put physical bitcoins out of scope, obliging the money manager to divert to GBTC to get exposure to bitcoins.
These market frictions justify a premium of secondary market quotes versus the NAV of the trust.
This premium has been quite volatile in the past, but contrary to popular belief it hasn't been correlated with "market sentiment" so I guess the driver was outside public information, and has been simply related to offering policies:
 |  | |
Correlation with price level is non-existent, and actually slightly negative.
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